Colombia 1Q stock outlook: 2-year rally begins to slow

 

Colombian stocks are showing signs of fatigue early in 2011 after rallying 33% in 2010 and 53% in 2009, as some investors take to the sidelines over concerns the country’s economy is slowing and shares are overpriced.

Low interest rates are likely to remain in place, however, and new foreign investors will continue to enter the local market, suggesting at least moderate gains can still be expected from Colombian stocks during the first three months of 2011.

Stocks began the year in the red, with the benchmark IGBC index declining during the first four sessions when a surprisingly high December inflation report spooked some market participants.

The Colombian Central Bank has expressed little concern over the inflation reading, calling it a transitory, supply-side result of high food prices from months of heavy, crop-damaging rains. In addition, analysts say last week’s drop in Colombia’s stock market came during light-volume holiday trading.

“The trend [last week] was certainly for stocks to decline,” said Cesar Cuervo, an analyst at Bogota brokerage Correval. “But overall, the fundamentals for Colombian stocks remain sound, and considering that 2010 earnings out in February are likely to show good results, I think stocks will see an upward trend in the first quarter.”

The IGBC index ended 2010 at an impressive 15,497 points. Analysts say by the end of the quarter the index will probably be around 16,000, a 3% gain.

Foreign investors will continue to play a larger role in determining the performance of the IGBC index, a trend the Colombian Stock Exchange has encouraged. The exchange added three hours of trading each day starting this quarter so the closing bell, now at 4 p.m. local time, coincides with the close of New York trading.

Also, for the first time in the IGBC’s history, the heaviest-weighted stock in the index isn’t a Colombian company.

Pacific Rubiales Energy Corp., a Canada-based energy producer, has dethroned Colombian state oil company Ecopetrol SA (ECOPETROL.BO) to become the heaviest-weighted in the index for the entire first quarter. Its shares now account for 24% of the index.

Pacific, whose shares more than doubled in 2010 to end the year at COP63,200, became the market heavyweight as a result of intense trading volume in its shares, which are listed both in Bogota and Toronto. The company’s main assets are in Colombia, where it works in joint ventures with Ecopetrol. It’s planning more Colombian expansion in 2011.

The Rubiales field is the largest in the country, which has led Pacific to become the face of Colombia’s oil boom in which production averaged 781,000 barrels a day during the first 11 months of 2010. That up from 671,000 barrels a day average in all of 2009, which was the highest since 2000.

Shares in Ecopetrol, meanwhile, could be a modest drag on the market during the first quarter. It was one of the most traded stocks in 2010 as it increased output and exploration in areas once controlled by Marxist guerrillas.

But there are concerns that the government, which controls 90% of the company, plans to privatize an additional 20%, a move that could flood the bourse with Ecopetrol stocks.

Shares of food-related firms such as Grupo Nacional de Chocolates SA, Colombia’s largest food producer, and Almacenes Exito, the country’s largest retailer, could take a hit over the next couple weeks due to concerns over food price inflation, analysts say.

Six months of lashing rains caused massive flooding and landslides and killed hundreds of people. It also damaged large swaths of agriculture, causing food prices to soar 1.65% in December.

These worries could have an overall negative effect on trading during the first weeks of the year.

“There could be some temporary corrections,” said analysts at Bolsa Y Renta in a report. “But under this scenario we don’t envision situations that could lead to corrections” such as those seen in 2008, when the IGBC index fell nearly 30%. (Dan Molinski / Dow Jones Newswires)

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